*This content is sponsored by RMB, a diversified financial services brand encompassing investment banking, fund management, private wealth management and advisory services.
By Dave Sinclair*
Investment holding company Remgro’s 2015 reverse takeover of the Al Noor Hospitals Group, based in the United Arab Emirates (UAE), was partially financed through the first ever exchangeable bond by a South African issuer. It was also the first capital market transaction for Remgro and was an innovative way for the group to raise funding in the international capital markets reducing their dependency on banks for long-term lending facilities.
Remgro successfully issued and settled £350-million of senior, secured, guaranteed bonds in March this year. The bonds, due in March 2021, are exchangeable into ordinary shares of Mediclinic International which is listed on the London Stock Exchange and the JSE.
Prior to the combination of the two businesses, Remgro, through its healthcare subsidiary Remgro Healthcare, owned 41.9% of the Mediclinic Group which operates in South Africa, Switzerland, UK and the UAE. The combination of Mediclinic and Al Noor created one of the largest private healthcare providers in Europe, the Middle East and Africa, including its minority stake in the Spire Healthcare Group in the UK. The transaction allowed Remgro to grow its healthcare portfolio and introduce geographic diversification and as well as enhancing returns going forward.
As part of the transaction, Remgro received shares in Al Noor and subscribed for an additional 72 million shares at a subscription price of £8.32 per share for an aggregate amount of £600-million. The £600 million was initially funded using existing cash resources and a short-term bridging facility with a view that this would be replaced with alternative longer-term funding sources.
A portion of the bridge was refinanced using the exchangeable bond. An exchangeable bond is an equity-linked instrument which offers a lower cash cost of financing than comparable capital market debt instruments by combining a bond with an equity option over an underlying share. Essentially, Remgro’s exchangeable bond has an embedded equity call option, which can be exercised to convert the bond into a predetermined number of Mediclinic shares, if the Mediclinic share price exceeds the option strike price.
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The initial strike price, for the bonds was set at £11.31 per Mediclinic share, representing a 30% premium above Mediclinic’s volume weighted average share price of £8.69 on the day of launch. The bonds are exchangeable into approximately 30.9 million Mediclinic shares, representing approximately 4.2% of the outstanding current share capital of Mediclinic.
The exchangeable bonds were issued through Remgro’s offshore subsidiary, Remgro Jersey, paying a coupon of 2.625% per annum, semi-annually in arrears. In pound terms, the coupon achieved by this structure represents a significant cash saving for Remgro when compared to vanilla capital market funding costs for an equivalent rated credit in the offshore markets. That translates into an interest saving of £6.5-million per annum for Remgro, or £32.5-million over the five year tenor of the instrument.
The bonds were issued at 100% of their principal amount and unless exchanged or repurchased and cancelled, will be redeemed at 100% of their principal amount on the maturity date of the bonds. Upon exchange of the bonds, Remgro, as the issuer, will have the discretionary right to deliver an amount in cash, instead of the shares. Upon redemption of the bonds, the Issuer will have the option to deliver a combination of shares and cash. The bonds are currently listed on the Frankfurt Stock Exchange.
Rand Merchant Bank (RMB) and Morgan Stanley, its joint venture partner, acted as joint global co-ordinators and joint book runners on this transaction. This exchangeable bond enables Remgro to optimise its cost of funding and demonstrates RMB’s ability to deliver innovative cross-border solutions for its clients, both local and international.
- Dave Sinclair is a Debt Capital Markets transactor at Rand Merchant Bank
